The Worst Five Years Since World War II

In spite of the claims by President Obama’s Council of Economic Advisors regarding his administration’s economic accomplishments, the U.S. economy has grown very slowly in the years since the Great Recession of 2008-09. After four years of slow growth, the latest data reveals that the U.S. economy shrank at a 2.9 percent annual rate during the first quarter of 2014.

That figure has been widely reported, but here are some figures that have not been reported, and they are quite eye-opening:

Over the first five years of Obama’s presidency, the U.S. economy grew more slowly than during any five-year period since just after the end of World War II, averaging less than 1.3 percent per year. If we leave out the sharp recession of 1945-46 following World War II, Obama looks even worse, ranking dead last among all presidents since 1932. No other president since the Great Depression has presided over such a steadily poor rate of economic growth during his first five years in office. This slow growth should not be a surprise in light of the policies this administration has pursued.

An economy usually grows rapidly in the years immediately following a recession. As Peter Ferrera points out in Forbes, the U.S. economy has not even reached its long run average rate of growth of 3.3 percent; the highest annual growth rate since Obama took office was 2.8 percent. Total growth in real GDP over the 19 quarters of economic recovery since the second quarter of 2009 has been 10.2 percent. Growth over the same length of time during previous post-World War II recoveries has ranged from 15.1 percent during George W. Bush’s presidency to 30 percent during the recovery that began when John F. Kennedy was elected.

Economic growth is usually faster than normal following a recession as entrepreneurs find more productive ways to employ the resources that were idle during the recession. How rapidly the economy grows and recovers depends partly on whether market forces are allowed to allocate resources, including labor, to their most productive uses. Unfortunately, the Obama administration has pursued several policies that make it harder for market forces to work. These include: bailouts, expansion of entitlement programs, regulation of the economy, tax increases, and huge government deficits.

Bailouts have resulted in capital being stuck in businesses that are either inefficiently run or have failed to produce goods and services that consumers’ value highly. In the absence of bailouts, some firms would have gone bankrupt and the capital reallocated to vibrant firms that are producing what consumers demand in a cost-effective way.

Expansion of government entitlement programs, such as food stamps and unemployment compensation, has reduced the incentive to be employed. The average benefit per recipient of food stamps jumped by approximately 25 percent between 2007 and 2010 due to rule changes. It also became easier to qualify for food stamps. As Richard Vedder points out in a Wall Street Journal editorial, the number of food stamp recipients rose by over 7 million between 2010 and 2012, a period of falling unemployment.

A number of changes associated with the American Reinvestment and Recovery Act (the economic stimulus package passed after Obama was elected) resulted in greater after-tax benefits to being unemployed. These include exempting part of unemployment insurance benefits from federal income taxes and subsidizing health insurance costs for laid off workers. Unemployment benefits also were extended for up to 99 weeks. In addition, the federal government developed mortgage modification formulas for banks to use, which resulted in a bigger reduction in interest payments for those with lower incomes.

The combined effect of a more generous food stamp program, more generous benefits for unemployed workers and mortgage modification formulas is to offset a considerable percentage of the reduction in income from being unemployed. This results in less incentive to work. If less people work, less output is produced and real GDP grows more slowly.

In addition to the policies described above, health care reform has also likely contributed to less employment and output in the economy. By requiring all firms employing more than 50 workers to provide health insurance coverage, the Affordable Care Act has discouraged some firms from hiring workers, while giving other firms an incentive to reduce hours or lay off workers.

Finally, uncertainty about the future direction of the economy has resulted in fixed investment that is only 93 percent as high as it was in 2006. This uncertainty likely stems from a combination of recent bailouts, huge and unsustainable government deficits, Federal Reserve monetary policy and growing government regulation such as Dodd-Frank and health care reform. Investment is what makes workers more productive thereby driving economic growth.

Although some of the policies responsible for slow growth began before Obama took office, he has expanded those policies and added new ones as well. It is necessary that those policies be reversed if the U.S. economy is going to again grow as rapidly as it did during most of the 2oth century. Such growth is vital both as a means to lift people out of poverty and to raise the revenue necessary to pay for Social Security and Medicare benefits to a growing population of retirees. Unfortunately, in the meantime, the lack of growth under Barack Obama during the last five years has been literally the worst for any president since World War II.

By Dr. Tracy C. Miller

–Dr. Tracy C. Miller is an associate professor of economics at Grove City College and fellow for economic theory and policy with The Center for Vision & Values. He holds a Ph.D. from University of Chicago.